What does Mexico’s president know that President Obama doesn’t?

By Marita Noon

Published 8:13 am, Monday, February 24, 2014

It is not often that Americans look south of the border for solutions, but Mexico’s President Enrique Peña Nieto seems to have figured out a few things in his first year of power that has, in six years, eluded Obama.

Late last month, Nieto spoke at the World Economic Forum in Davos, Switzerland. There, he highlighted his first-year achievements: “a legislative consensus with the two major opposition parties on the transformations and structural reforms that the country needed,” reports Mexico City’s The News. He pointed out that this has been achieved “in a climate of plurality and diversity.”

The reforms, that passed Dec. 12, 2013, allow profit- and production-sharing contracts, and licenses. The reforms also put an end to government monopolies in the operation of oil-and-gas fields, while maintaining the Mexican government’s ownership of the country’s resources.

“The current government’s ability to build coalitions puts Mexico on the verge of its biggest economic victory since the North American Free Trade Agreement,” said Arturo Sarukhan, who has served in Mexico’s Foreign Affairs Ministry.

One third of Mexico’s federal budget comes from oil wealth that has declined 25 percent since its peak just a decade ago. Reform has the potential to transform Mexico’s economy by inviting foreign investment, which Nieto successfully argued is needed to “allow Mexico to capitalize on its shale oil-and-gas deposits.” Because almost all of the profits of Mexico’s state-owned oil company, Pemex, have gone back into the national coffers — and not into research and development — Mexico lacks the technical expertise to exploit its unconventional resources and deep-water deposits.

Fluvio C. Ruiz Alarcon, an independent director at Pemex, said, “It will be vital to improve its technological competencies if Pemex is to remain competitive. It will need firm partnerships with companies from other countries.”

The critical phase of drafting the laws to implement December’s energy reform bill began Feb. 1. These laws will spell out the terms and conditions for foreign international oil companies to explore and develop Mexico’s deep-water and shale resources. OilPrice.com reports: “Mexican Congress has 12 months to develop energy-related environmental regulations and to establish the National Center of Natural Gas Control and the National Energy Control Center.”

Nieto’s energy reforms face some opposition, but he understands how important developing Mexico’s energy resources are to economic growth — something that seems lost on Obama.

In his Davos comments, Nieto said that Mexico is committed to “conditions of security and legal certainty.” And that “we’re seeking to be more competitive.” These attitudes, combined with the ability to “build coalitions” should offer lessons to President Obama.

Another thing that could be learned from Nieto is that lower energy prices are the key drivers of economic growth.

While most of the focus on Mexico’s energy reform has been on the oil-and-gas sector, Nieto’s plans also end the monopoly held by the national utility CFE. Mexico’s manufacturing and commercial customers currently pay a surcharge for electricity, while residential, agricultural and service industry users’ rates are subsidized. Barclay’s Marco Oviedo, points out: “Mexican industry this year has paid 45 percent more for its electricity than factories in the U.S.” Even though residential customers’ rates are subsidized, they are still, according the Financial Times: “Among the highest in the 34-member Organization for Economic Co-operation and development.”

Francisco Salazar, head of CRE, the country’s regulatory energy commission, has called the high price of electricity in Mexico “a deterrent to investment.”

Reuters reports: “About half of Mexico’s current electricity is generated from natural gas, up dramatically since 2000, when costlier, dirtier fuel oil was the major electricity fuel.” Despite its vast, albeit inaccessible with Pemex’s current technology, supplies — estimated to be one of the world’s largest shale gas resource bases — Pemex is building pipelines to bring cheap U.S. shale gas into Mexico. The Los Ramones natural gas pipeline will bring natural gas from Texas’ Eagle Ford shale — which extends into Mexico and may be even bigger than the portion on the U.S. side of the border — into Mexico’s industrial heartland. Roman Kilisek, in a thorough discussion of the topic, titled: “Mexico’s energy reforms: can Mexico emerge as a prime global oil & gas industry expansion prospect?” posits that it will take years for Mexico to unlock those reserves, “while facing a severe natural gas shortage in the meantime.” He said that by the time the Los Ramones pipeline is finished, “natural gas demand will have already outstripped the pipeline’s capacity.” To meet the demand, Pemex is importing Liquefied Natural Gas at more than five times the price of gas in the U.S. Rafael Ch, an energy researcher with Mexico’s CIDAC think tank, said: “The main problem is that we just don’t have the capacity to meet our future electricity demand.”

Nieto understands the need to build pipelines to bring the needed supplies into the country. Meanwhile, in America, we’ve been waiting for five years for the Obama administration to approve the Keystone pipeline. Nieto understands that lower energy costs will help his country be competitive. Obama’s policies have increased electricity prices — both residential and industrial — in the U.S.

Having just spent the past week in Mexico, I am keenly aware of the need for Mexico to lift its standard of living and increase economic growth, which Nieto understands energy can provide. As America’s economic numbers slip, this, too, is a lesson Obama needs to learn.

The author of Energy Freedom, Marita Noon serves as the executive director for Energy Makes America Great Inc. and the companion educational organization, the Citizens’ Alliance for Responsible Energy (CARE).